Saturday, September 14, 2013

A Misguided Recommendation Needs a Reply

Recently, a number of leading US economists, led by Lawrence J. Kotlikoff, have called for new annual financial projections from the US government. That of fiscal gap analysis and generational analysis. Fiscal gap is supposed to be a true evaluation of expected government outlays, and the generational analysis is a measure of how much cost is pasted from the current generation to future generations.Hugo Scott-Gall interviews Dr. Kotlikoff about this, which can be found, among other sites, here:http://www.zerohedge.com/news/2013-09-11/lawrence-kotlikoff-us-fiscal-gap-200-trillion-our-country-broke

I believe that a response of some kind is in order as this interview reveals the rational behind this call for new accounting and what I believe to be a common mindset that has taken over the economics community, which is at odds with the facts and with the best interest of the US. This is what happens when a profession suffers from self-selection.

Kotlikoff is essentially calling for fiscal responsibility, and fiscal responsibility is a good thing. Unfortunately the US government has chosen to not follow that path starting in 1971 with the repeal of Bretton Woods. Then the election of Reagan and his creation of massive deficits, and the changes in how many figures like GDP, CPI, etc., are calculated. Then Alan Greenspan in Jan, 2001 predicted that the US would pay off the national debt by 2011 (1), which was used to justify the Bush tax cuts in order to prevent the US government from running a surplus. And finally the often quoted “deficits don’t matter” of the Dick Cheney era. Before these events we had a functioning system. It is unfortunate that the government saw fit to throw this system away. Why did the US choose to go this route?

A key lesson from examining these events is that it is unwise to make budget projections more than 10 years into the future, as circumstances and events can change these values dramatically from what was projected. The gap and generational estimates go forward many decades into the future so that their value is suspect, and their impact may be misleading.

The problem with the analysis from Kotlikoff, and similar economists, is that they choose to ignore the history of how and why we got where we are, so they don’t go back and say this choice was bad or that policy was wrong, and do a comparative analysis of what would have happened without those choices and policies (or maybe they do many who knows). I.e. where would we be today if we didn’t choose deficits through massive tax cuts for the wealthy, or didn’t allow massive trade deficits? Didn’t choose abandon trade settlement? Didn't change government economic formulas? I suspect we would not be having this conversation today.

So, having ignored this history, he goes on to imply that the problem is caused mainly by the common folks being greedy because of the cost of social programs. He claims that 60% of the future shortfall in government budgets can be attributed to medical spending. He then claims to be an economist, but makes predominantly financial arguments!? His discussion is primarily about money, rather than the production and consumption of goods and services. He don’t even mention trade policy and its effects. The one time he does mention true economics is when he insists on limiting the fraction of public health care spending to 10% of GDP by fiat, without regards to the effect on the health of the American people. A true economic analysis of health care would consider the population size and distribution, the likely health problems and care needs for each segment of the population, the health care facilities and staff needed to provide this care, etc. But all of this goes unmentioned, which suggests that health care for the American people isn't a goal. Merely constraining the cost of government spending on health care is all that matters. (He does make an exception for the affluent who can pay for their health care from their own resources)

The main effects of deficits, and the resulting curtailment of government spending, and tax and trade policies, which has been noted repeatedly in many sources, has been to reduce the middle class, and to enrich the already wealthy. The tax cuts have mainly benefited the very wealthy while the various bailouts and business support policies have moved their liabilities onto the public books. Why does he ignore the multi trillion dollar bailout of Wall Street? What about taxing them to get some of that money back? Why does he think that the taxes must be shared equally by everyone, if a small fraction of the population caused most of the problems? This seems to me an institutionalizing of privatizing gains and socializing losses.

His argument about a lack of national savings is somewhat irrelevant as corporations are sitting on record amounts of cash and short term assets which they choose not to invest. (2) It is the lack of investment in capital expenditures, which he acknowledges, that is the immediate cause of insufficient growth in the US. But why would companies invest in the US if they are induced by government policy to invest overseas instead?

What about the 8.8 million Americans who have lost their jobs since the start of the recession? (3) What if we put them back to work in manufacturing and balanced our trade? Wouldn't that produce an increase in the receipts of the government as those new workers paid taxes? What if we had a national economic policy again that promotes the best interests of our nation?

Yes, all programs like health care must be weighed in terms of their economic cost. And not all expenditures are possible. But these are policy decisions about how the nation, acting as a nation, will allocate its resources. If our society determines that spending 10% of GDP on health care is good, or even if spending 15% is good, then so be it. I don’t mind the gap accounting, as that is just a guide to future costs that should be taken with a grain of salt. However, I think that Kotlikoff and others will use it to keep claiming “we’re broke” everytime a good investment in the American people, or a program to “promote the general welfare” as the Constitution mandates, is proposed. The Congress must return to fiscal responsibility and no gimmicks will cause that to happen. A fundamental change in how our country sees itself and acts as a nation is needed to return to the prosperity of the past. Only then will Congress return to valuing fiscal responsibility.

(1) http://www.federalreserve.gov/boarddocs/testimony/2001/20010125/

(2) http://www.stlouisfed.org/publications/re/articles/?id=2314 for an analysis(3) http://en.wikipedia.org/wiki/Job_losses_caused_by_the_Great_Recession totals the government numbers

About Me

I have a Ph.D. in physics and work in technology research and development. I've done work on muonic atoms, plastic solar cells, Hydrogen storage for fuel cell cars, and wireless lamps. I've worked on a variety of systems for space systems, defense and cyber security. Besides the technical world I have a strong interest in politics, economics, and finance and how they affect the future of the US.